Reality Bites Public Pensions

3 Aug 2011

IEA Fellow Nick Silver writes for the Wall Street Journal

Public-sector pensions are shaping up as one of the defining issues in British politics this year. Barely a week goes by without new announcements, leaks or agitation from various unions. But those who have followed the issue over the years can be forgiven a sense of deja vu: The new government proposes reforms to public-sector pensions, the workers strike and then the government backs down.

This is not an exclusively English disease; all over the world civil servants rally to protect their pensions. And there is a reason that politicians generally back down in the face of unionized resistance: If you are a politician, it is expensive to pay civil servants. So instead you promise workers very generous pensions that don't have to be paid until you are long out of office. No one understands the actual cost of pensions enough to care—for politicians they become someone else's problem. The result is that civil servants typically enjoy very generous benefits. A recent report by the independent Public Sector Pensions Commission calculates that in the U.K., a public-sector pension is equivalent to receiving an extra 44% in salary every year. For some workers, such as police, this additional compensation equals up to an additional 70% each year. Even these figures understate the actual value of pensions, on which workers pay little or no tax and so are roughly worth an extra 10% of base salary.

The costs of these pensions are starting to get out of control, which has motivated the Cameron government to propose raising the pension age, reducing the amount that payments increase every year, and increasing the amount that public-sector workers must contribute to their pensions. Unions' response, perhaps not surprisingly, amounts to "over my dead body."